CERTIFICATE LEVEL

Subject Fundamentals of Management Accounting (BA2)

Hashan Bellanthuda
Lecturer ACMA, CGMA, ACCA Affiliate

Module Tutorial 01 – Introduction to Management Accounting

Code BA2/HB/01
 Context of Management Accounting and Costing
Study Session 1: Introduction to Management Accounting

Topic 01 – Management accounting functions

Study
Session-1

Topic 02 - Costing

BA2 – Tutorial 01 – Hashan Bellanthuda – “Whatever you do, give your best!” 1
Introduction to Management Accounting
CIMA definition

The application of the principles of accounting and financial management to create,

protect, preserve and increase value for the stakeholders of profit and not-for-profit
enterprises in the public and private sectors.

Main areas of management accounting

1. Planning
2. Control
3. Decision making
4. Costing
5. Performance evaluation

Global management accounting principles

1. Communication provides insight which is influential

• Involvement of all employees

• Less jargon
• Assist decision making

2. Information is relevant

• Should be accurate/reliable and timely

• Financial and non financial
• Quantitative and qualitative
• Internal and external

3. Impact on value is analyzed

• To identify the root cause behind outcomes

• Using models for decision making

4. Stewardship builds trust

• Utilizing competent employees

• CIMA code of ethics
• Balancing short term and long term aspects

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Role of the management accountant

• Provide information for planning, controlling and decision making

• Forecast the future of the business

• Identify opportunities for enhancing organizational performance

Functions of a management accountant -CIMA

• Setting corporate objectives

• Formulating strategic plans
• Formulating operational level plans
• Financing
• Designing systems
• Analyzing performance
• Improving business systems and processes

Functions of a management accountant –(IFAC)

• Creation of value
• Analysis of information
• Performance measurement and communication
• Financial control
• Reduction of waste
• Risk management

Management accounting vs financial accounting

Management accounting Financial accounting

For internal use For external use

At the discretion of management Statutory requirement

Not governed by rules and regulations Governed by rules and regulations

Mainly concerned with providing Mainly concerned with preparing

information to management to assist statutory accounts for an organization
decision-making

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Management accountant’s position

1. As a dedicated business partner:

- This is where the management accountant (MA) is seen as an integral part of the
business area and treated as a business partner.

- The MA should act professionally, maintain integrity at all times as well as

demonstrate technical and business awareness.

- The managers of the business should trust the MA, respect his/her knowledge,
state requirements clearly & discuss all aspects of work confidentially with the MA.

- Sometimes the MA is expected to play the role of an adviser. This is where the MA
gets more involved than a traditional accountant who simply reports numbers
although the level of importance is lower than the role of a dedicated business
partner.

2. As a shared service centre:

- This is where the finance function of all the business areas is brought into one
centre (central finance function).

- This will save costs by reduced head count, result in a better service & maintain
consistency. However, this will reduce the strength of the relationship between MA
& the business. Also, the MA will have less knowledge on specific business areas.

3. As a business process outsourcing centre

- This is where the finance function is completely outsourced.

- This may result in cost savings, access to specialist providers and release of
capacity.

- The drawbacks include the loss of control, over-reliance on the external provider
and confidentiality of information.

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Decision making levels

1. Strategic level – This refers to the top management of the business including
directors & senior managers. They are usually involved in making long-term
decisions such as:

- What are the new products we should make?

- In which areas should we open new branches?
- What is our target market share in the next 5 years and what is the strategy
to achieve this?

2. Tactical / management level – This refers to the middle management of the

business consisting of regional managers, marketing managers, finance
managers, etc. The middle management acts as the communication bridge
between the strategic and operational levels. Typical decisions are as follows:

- What should be the revised price of a product?

- Asset purchasing decisions.
- Managing medium term risks.

3. Operational level – This level consists of employees involved in the day to day
running operations of the business. This would include factory managers,
branch managers, production labourers, etc. Typical decisions are as follows:
- How many units should be produced for the next week?
- How many liters of material should we order for the next week?
- How many hours of overtime would be required for the next 2 weeks?

Management information

Information supplied to managers for the purpose of planning, controlling and

decision making.

- Strategic level – Requires unstructured and summarized information

- Tactical level – The level of detail will be higher than strategic level but lower than
operational level

- Operational level – Requires detailed and highly structured information

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Characteristics of good information

• Accurate
• Complete
• Cost beneficial
• Understandable
• Relevant
• Authoritative
• Timely
• Easy to use

History of CIMA

• Founded in 1919 as ICWA

• In 1972 changed to ICMA
• In 1986 is was functioning as CIMA
• In 2012 CIMA undertook a joint venture with AICPA to form a new designation CGMA

CIMA and the profession of management accounting

• Ensures ethical practice

• Regulates the members code of practice
• Members and students should abide by the code of ethics (COPPI)

➢ Confidentiality
➢ Objectivity
➢ Professional behaviour
➢ Professional competence and due care
➢ Integrity

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Introduction to costing

Cost object
A cost object is anything for which costs can be ascertained.
E.g. Product, service, department, activity, customer, etc.

Cost unit

A unit of product/service in relation to which costs can be ascertained.

E.g. For Apple – iPhones

Cost centre

A production/service location, function, activity or an item of equipment for which costs are
accumulated.
E.g. In a garment factory, these can be material receiving, cutting, tailoring, finishing and
storage.

Cost classification

• The basis for cost classification is as follows:

1. By element
2. By nature
3. By function
4. By behavior

By element
• Material
• Labour
• Expenses

By nature
• Direct cost
• Indirect cost

By Function
• Production cost
• Non production cost

By behavior
• Identifies cost changes with the change in activity levels
• Example for activity levels
o Volume of output
o Items sold
o Invoices issued
o Electricity consumed, etc.

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 • Types of cost under cost behavior classification
o Fixed cost
o Stepped cost
o Variable cost
o Semi variable cost

Cost estimating methods

• There are three main methods used in forecasting cost. They are:
o High-low method
o Line of best fit method
o Linear regression

Correlation of coefficient

• A measure of the amount of linear correlation present in a set of pairs of data

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Theory Focus Questions (TFQ’s)

TFQ 01

In general terms, financial accounting is for internal reporting whereas management

accounting is for external reporting.

True

False

TFQ 02

Which one of the following is not usually considered to be one of the purposes of
management information?

A Implementing
B Planning
C Control
D Decision making

TFQ 03

Management information is used for planning, control and . .

TFQ 04

Non-financial information is relevant to management accounting.

True

False

TFQ 05

Give appropriate cost units for the following:

Business Appropriate cost unit

Car manufacturer

Ball bearing manufacturer

Builder

Management consultant

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TFQ 06

Classify the following labour costs as either direct or indirect.

a) The basic pay of direct workers (cash paid, tax and other deductions) is a

cost.

b) The basic pay of indirect workers is a cost.

c) Overtime premium, ie the premium above pay, for working overtime is a

cost.

d) Bonus payments under a group bonus scheme is a cost.

e) Social security (eg Employer’s National Insurance) contributions is a cost

f) Idle time of direct workers, paid while waiting for work is a cost.

TFQ 07

The costs of operating the maintenance department of a computer manufacturer named

BNB for the last four months have been as follows:

Production
Month Cost volume
$ Units

1 110,000 7,000
2 115,000 8,000
3 111 ,000 7,700
4 97,000 6,000

Required

(a) Calculate the costs that should be expected in month 5 when output is expected to be
7,500 units. Ignore inflation.

(b) What is the equation for estimating the total cost for a given level of output?

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TFQ 08

The total costs of a business for differing levels of output are as follows:

Month Output Total costs

Units $'000
January 500 70
February 200 30
March 800 90
April 1,000 110

(a) What are the fixed and variable elements of the total cost using the high-low method?

A Y = $30,000 + $100x B Y = $10,000 + $11 Ox

C Y = $30,000+ $11 Ox D Y- $10,000 + $100x

(b) What is the total cost if output is 400 units?

TFQ 09

The cost plan for different regions of a company is shown below

Cost ($000) Sales units (000)

236 11
234 12
298 18
250 15
246 13
202 10

Formulate and interpret the linear regression formula for the above scenario

TFQ 10

Calculate the Pearson’s correlation of coefficient for the data on advertising expense and sales

Monthly Advertising expenses ($000) Following months sales ($000)

1.3 151.6
0.9 100.1
1.8 199.3
2.1 221.2
1.5 170.0

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Exam Focus Questions (EFQ’s)

EFQ 01

Which of the following is NOT part of the CIMA definition of management accounting?

A Having skills, knowledge and expertise

B Determining capital structure and funding that structure
C Informing operational decisions
D Planning long, medium and short run operations

EFQ 02

Which of the following is NOT part of the role of CIMA?

A Offering a continuing education scheme to its members

B Ensuring that each member complies with CIMA's regulations
C Issuing a code of ethics
D Upholding public confidence in management accounting

EFQ 03

What is the purpose of management information?

A Planning only
B Planning and control only
C Planning, control and decision making only
D Planning, control, decision making and research and development

EFQ 04

For whom are management accounts prepared?

A Employees
B internal managers
C Shareholders
D Suppliers

EFQ 05

CIMA defines management accounting as:

'The application of the principles of accounting and financial management to create, protect,
preserve and increase value for the of for-profit and not-for profit enterprises
in the public and private sectors.

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 A Auditors
B Stakeholders
C Owners
D Customer

EFQ 06

Which of the following statements are true?

1 The main role of the management accountant is to produce financial accounts.

2 Management accountants always work within the finance function.
3 Management accountants always work in partnership with business manager.

A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D None of the above

EFQ 07

Which THREE of the following statements about CIMA are true?

A CIMA was established over 90 years ago.

B CIMA members may only work in the UK.
C CIMA members and students must comply with the CIMA code of ethics.
D CIMA members work mainly on the production of financial accounts.
E CIMA members are not qualified to work as finance directors.
F CIMA members work in all areas of business.

EFQ 08

Who is responsible for planning, control and decision making in a business?

A Shareholders or owners
B Management
C Supervisors
D Auditors

EFQ 09

Which FOUR of the following are the Global Management Accounting Principles?

 Sustainable organisations achieve long term economic performance

 Stewardship builds trust

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 Communication provides insight that is influential

 The letter and the spirit of laws, codes and regulations are followed

 Impact on value is analysed

 Information is relevant

EFQ 10

Are the following statements true or false?

1 The Global Management Accounting Principles were created to support organisations in

benchmarking and improving their management accounting systems.
2 The foundation of the Global Management Accounting Principles is that an effective
management accounting function improves decision making.

A Both statements are true.

B Both statements are false.
C Statement 1 is true and statement 2 is false.
D Statement 1 is false and statement 2 is true.

EFQ 11

Which of the following items might be a suitable cost unit within the accounts payable
department of a company?

1 Postage cost
2 Invoice processed
3 Supplier account

A Item 1 only
B Item 2 only
C Item 3 only
D Items 2 and 3 only

EFQ 12

Which of the following costs are part of the prime cost for a manufacturing company?

A Cost of transporting raw materials from the supplier’s premises

B Wages of factory workers engaged in machine maintenance
C Depreciation of lorries used for deliveries to customers
D Cost of indirect production materials

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EFQ 13

Depreciation on production equipment is (select TWO answers):

A Not a cash cost

B Part of production overheads
C Part of prime cost
D Always calculated using a machine-hour rate

EFQ 14

A company makes chairs and tables.

Which of the following items are treated as an indirect cost?

A Wood used to make a chair

B Metal used for the legs of a chair
C Fabric to cover the seat of a chair
D The salary of the sales director of the company

EFQ 15

The audit fee paid by a manufacturing company are classified by that company as:

A A production overhead cost

B A selling and distribution cost
C A research and development cost
D An administration cost

EFQ 16

Cost centres are:

A Units of output or service for which costs are ascertained

B Functions or locations for which costs are ascertained
C A segment of the organisation for which budgets are prepared
D Amounts of expenditure attributable to various activities

EFQ 17

Which of the following costs would NOT be classified as a production overhead cost in a food
processing company?

A The cost of renting the factory building

B The salary of the factory manager
C The depreciation of equipment located in the materials store
D The cost of ingredients

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EFQ 18

A production manager's salary in a factory that makes one product can be classified as:

A Direct expense
B Direct labour
C Indirect expense
D indirect labour

EFQ 19

L Co is a badminton racquet manufacturer.

Select the correct entries below to match the correct cost type to each cost item.

Selling and distribution costs

Direct materials
Indirect labour
Direct labour
Administration costs
Cost item Cost type

Carbon for racquet heads

Office stationery

Wages of employees stringing racquets

Supervisors' salaries

Advertising stand at badminton tournaments

EFQ 20

Variable costs are conventionaily deemed to:

A Be constant per unit of output

B Vary per unit of output as production volume changes
C Be constant in total when production volume changes
D Vary, in total, from period to period when production is constant

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EFQ 21

The following is a graph of cost against level of activity;

To which one of the following costs does the graph correspond?

A Electricity bills made up of a standing charge and a variable charge

B Bonus payment to employees when production reaches a certain level
C Salesman's commissions payable per unit up to a maximum amount of commission
D Bulk discounts on purchases - the discount being given on all units purchased

EFQ 22

EFQ 23

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Which of the following situations is described by the graph?

A Discounts are received on additional purchases of material when certain quantities are
purchased.
B Employees are paid a guaranteed weekly wage, together with bonuses for higher levels of
production.
C A licence is purchased from the government which allows unlimited production.
D Additional space is rented to cope with the need to increase production.

EFQ 24

EFQ 25

EFQ 26

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 The following information relates to EFQs 27, 28 and 29

Which of the above graphs illustrates the costs described in the next three questions?

EFQ 27

A linear variable cost - when the vertical axis represents cost incurred

EFQ 28

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EFQ 29

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